by The effects of China’s economic slowdown are truly global: At the same time that investors are pulling billions of dollars out of neighboring Asian countries, Latin American countries are seeing raw materials exports to the Middle Kingdom fall sharply, and China concerns have brought volatility back to stock markets around the world and doused investor risk appetite. Could Europe be the next to be affected by sinking Chinese demand? Unlike Latin America, a China-related sharp fall in exports isn’t likely in Europe. That’s not to say there aren’t European industries that are vulnerable to China’s problems. China takes 8.1 percent of Europe’s raw metals exports, 8.5 percent of its wood and paper, and 10.4 percent of raw materials used to make textiles. In Germany, 10 percent of machinery and transport exports go to China, and those China-bound machinery and transport products make up 5 percent of the country’s total exports. Overall, however, Chinese demand accounts for just 1 percent of Europe’s GDP, while demand in the rest of non-Japan Asia accounts for another 1 percent. The euro area’s exports to China fell nearly 5 percent last year and yet overall exports rose 9 percent, with exports to developed economies driving much of the growth.
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Alice Gomstyn considers the following as important: World Affairs: Features
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The effects of China’s economic slowdown are truly global: At the same time that investors are pulling billions of dollars out of neighboring Asian countries, Latin American countries are seeing raw materials exports to the Middle Kingdom fall sharply, and China concerns have brought volatility back to stock markets around the world and doused investor risk appetite. Could Europe be the next to be affected by sinking Chinese demand?
Unlike Latin America, a China-related sharp fall in exports isn’t likely in Europe. That’s not to say there aren’t European industries that are vulnerable to China’s problems. China takes 8.1 percent of Europe’s raw metals exports, 8.5 percent of its wood and paper, and 10.4 percent of raw materials used to make textiles. In Germany, 10 percent of machinery and transport exports go to China, and those China-bound machinery and transport products make up 5 percent of the country’s total exports.
Overall, however, Chinese demand accounts for just 1 percent of Europe’s GDP, while demand in the rest of non-Japan Asia accounts for another 1 percent. The euro area’s exports to China fell nearly 5 percent last year and yet overall exports rose 9 percent, with exports to developed economies driving much of the growth. As a result, analysts in Credit Suisse’s Global Markets division are skeptical that “the direct effects of a further slowdown in domestic demand in China or other emerging markets would deliver a severe, further, downside shock to euro area growth.”
Given the international reach of Europe’s banking system, the risk of financial contagion originating in China and finding its way into the EU cannot be dismissed. In the last quarter of 2015, more than 50 percent of Chinese banks saw an increase in the number of non-performing loans. That’s a concern for European banks that have lent money to Chinese banks, as well as borrowers who could see their access to credit decline if banks grappling with China-related losses pull back on domestic lending. French and German banks have the most direct exposure to China, having increased their loans to Chinese banks in recent years.
But the vulnerability of French and German banks – which hold some €40 billion and €30 billion in Chinese assets, respectively – pales in comparison to that of the Spanish banking system. While Spanish banks lend little to China, at least in comparison to their French and German counterparts, they do have a large exposure to Latin America, which is suffering from declining Chinese demand for commodities. Spanish banks held about €350 billion worth of Latin American and Caribbean assets last year. Credit Suisse said there’s already some evidence that credit conditions in Spain have begun to deteriorate. “In the event of a more severe financial crisis across the emerging markets asset class, it is possible that credit conditions for Spanish banks [will] tighten,” said the bank’s Global Market division analysts.
Outside of banking, perhaps the greatest China-related obstacle facing Europe is psychological. For starters, Credit Suisse’s Global Risk Appetite index is in ‘panic’ mode. What’s more, Germany’s Ifo Institute reported late last month that its monthly confidence index dropped from 108.6 in December to 107.3 in January. An earlier survey by Credit Suisse found that concerns about China and Asia topped European executives’ list of worries last year. It remains to be seen whether those concerns will translate into declining investment, or whether European business leaders will concentrate on the half of the glass that is still full.
Credit Suisse economists believe there is much to be said for the latter point of view. Europe’s outlook – and, by extension, the outlook for European equities – appears promising for a number of reasons, including anticipated easing by the European Central Bank, an improving labor market, and strong consumer demand, buoyed by a nearly 50 percent drop in the oil price in euro terms. Since Europe isn’t much for oil production, low energy prices should boost corporate margins, investment, and employment as well as household income. Fiscal conditions are finally easing, and credit conditions are loosening, too. Credit Suisse expects the euro area economy to grow 1.8 percent this year – up from 1.5 percent in 2015 and double the 0.9 percent growth rate of 2014 – and, for now, economists remain “relatively sanguine” about China’s problems dealing any kind of blow to that forecast.